Some of the best regarded “boutique” crowdfunding platforms (those that make investments of over £1m and with a minimum individual investment) are run by ex-City people – people who have spent time in corporate finance firms, venture capital, or investment banking.
Hugo Chance, entrepreneur and former head of family offices at Zeus Capital, has made the decision to launch his own broking firm to support fast growth SMEs looking to raise from £1m to £50m. I ask him why, at a time when technology is driving down costs and increasing access to investment, he’s opted for a good old-fashioned approach to fundraising.
Why are you building Chance Capital as a brokerage and not a platform?
There’s a very clear distinction between angel investors and professional investors, where ticket sizes are over £1m. When you’re dealing with the latter, there’s often the requirement to meet and eyeball businesses face to face. The real litmus test for these investors is the connection they can make in person. After all, you are investing in the people over the business.
Platforms are great if you’re not investing very large amounts, if you don’t necessarily need to be strategic, and if you’re content being a passive investor. For some of the larger deals, I’m sure some of the more developed (older) platforms can make introductions offline.
That said, when you’re dealing with larger ticket sizes where investors want to take an active role, face-to-face contact is paramount. It isn’t about not using technology, it’s about using it where it’s relevant and where it can enhance a process. Crowdfunding and peer-to-peer lending of course have their place, but you seldom get that face to face airtime with a business.
A retail investor putting in between £3,000 and £5,000 will typically have non-voting rights shares, and might make a decision based on a set of videos, some documentation and forum-style interaction with the company. Sliding up the scale, professional investors, often investing at least £1m, are going to want to do a pretty deep level of due diligence themselves. And more than that, the investments they’re making will likely complement longer-term strategic goals.
So what role do your investors take and who are they?
Typically, for a £1m to £5m raise, I’d be sourcing all capital from one strategic source. By that, I mean that professional investors will usually take an active role – taking a board seat, often with a significant knowledge of the sector in question along with their own black book of industry contacts.
I major on private capital relationships, working with high net worth individuals, single family offices, multi family offices, advisory firms, private equity and SME debt funds... that said, there’s a certain point at which some large family offices led by investment committees can act more like institutions – led more with head than heart! Their due diligence and term sheets can sometimes look more like those of some venture capital firms.
The key element to any investment is the people you’re investing in. It’s my job to successfully marry the investors with the myriad of businesses that come to us seeking growth capital. Sometimes businesses will specify that they don’t want to see VC firms because they’ve been burnt before by stringent terms, restrictive rights clauses and aggressive exit expectations. Most family offices have more of a laid-back relational mindset, and can be open to investment at an earlier stage.
For larger raises, I might look at two or three strategic investors. We have over 400 professional investors on our books. Some of them I’ve known for two months, others for 20 years. To date, we have agreed terms on over £60m of funding covering four deals.
You speak to businesses that have considered crowfunding. What, to your mind, should firms think about before going for it?
Crowdfunding can be a rapid way to raise capital. Similarly, it can be a risky option. That’s because, in some ways, it’s like a trial float – but often at the start of your business’s lifetime. In other words, you’re seeing how retail investors take to it, which means there’s a danger they won’t like it.
The point of equity investment, clearly, is that you’re investing in business growth. So you have to ask about the credibility of the team behind it. That means building relationships. I believe there is a place for crowdfunding, but not necessarily for those wishing to connect with fewer professional investors who can bring far more than just capital to the table.
I see around 10 new businesses a week, many of which are early stage firms looking for between £1-5m. In this difficult post family/friends but pre VC stage of funding, many have assumed crowdfunding is the only option – it isn’t.